Purplebricks(LSE: PURP) and Watkin Jones (LSE: WJG) have a number of things in common. Theyre both among the biggest 25 companies on the AIM market. Both listed relatively recently at 100p a share. Purplebricks debuted in December 2015 and Watkin Jones in March 2016. Both are connected to the property market and both have high-profile fund manager Neil Woodford as a major investor. Woodford owns over 29% of Purplebricks and 13% of Watkin Jones.
The two companies also have some notable differences. Purplebricks was founded less than 10 years ago and is a disruptive hybrid estate agency. Watkin Jones roots go back as far as 1791 and its engaged in a more traditional business of property development and construction. Purplebricks is currently loss-making, while Watkin Jones is not only profitable, but also pays a dividend.
Just over a year ago, I named Watkin Jones as a stock Id buy for 2018, and Purplebricks as a stock Id sell. In a year in which the AIM market fell 19.2%, the Watkin Jones share price declined 6.4% (220p to 206p), while the Purplebricks share price slumped a whopping 64.4% (416p to 148p). In view of the magnitude of the difference in the movement of their share prices over the past year, have I changed my rating of these two stocks for 2019?
Purple blues
A year ago, I was concerned about Purplebricks high valuation. The shares were trading at 160 times a maiden profit forecast for its financial year ending April 2019. Its not now forecast to make a profit this year. Or next year. The maiden profit is currently pencilled in for the year to April 2021. And the current share price is 130 times that forecast profit.
Aside from the sky-high valuation and a maiden profit forecast that has continually retreated over the horizon (originally forecast for the year to April 2017), I have another big concern. I have serious doubts about the sustainability of Purplebricks business model.
House-sellers pay the company upfront whether the sale completes or not. This might have just about worked in the booming property market of the last few years, when houses were selling themselves, but were now seeing a slowing market not only in the UK, but also in Australia, Canada and the US, where Purplebricks is aggressively expanding.
With traditional estate agents also fighting back, I can see Purplebricks going a similar way to another Woodford flop: disruptive mattress seller eve Sleep. As such, I continue to rate the stock a sell.
Keep up with the Joneses
I believe Woodford is on far more solid ground with Watkin Jones, and I continue to rate this stock a buy. The company is a UK leader in multi-occupancy residential property, with a focus on the student accommodation and build-to-rent sectors. Theres good growth here, but I also think this positioning together with the groups accommodation management arm could provide it with more resilience through the economic cycle than companies focused on some of the other areas of the property market.
Earlier this week, Watkin Jones posted record results for its financial year ended 30 September. Earnings increased 14% and its board upped the dividend by 15%. At the current share price, were looking at a valuation of 13.7 times trailing earnings, and a running dividend yield of 3.5%. I view this as an attractive investment proposition.
In the meantime, one of our top investing analysts has put together a free report called“A Top Growth Share From The Motley Fool”, featuring a mid-cap firm enjoying strong growth that looks set to continue. To find out its name and why we like it for free,click here now!